Traders on the floor of the NYSE, June 1, 2022.
Source: NYSE
Follow Morgan Stanley co-chair Ted Pick.
According to Pick, who said last week at a financial conference in New York.
“It was an extraordinary moment; we had our first pandemic in 100 years. We had our first invasion of Europe in 75 years. And we had our first inflation around the world in 40 years. five,” said Pick. “When you look at the combination, the intersection of pandemics, of wars, of inflation, it signals a paradigm shift, the end of 15 years of financial repression and the coming of the next era. “
Top Wall Street executives issued dire warnings about the economy last week, led by JPMorgan Chase CEO Jamie Dimonwho said that a “storm is right out there, on the way, go our way. “That sentiment was echoed by Goldman Sachs Chairman John Waldron, who called the overlap “shocks to the system” unprecedented. Even regional banking CEO Bill Demchak said he thinks a recession is inevitable.
Rather than offer just words of caution, Pick – a three-decade veteran of Morgan Stanley who leads the company’s banking and sales divisions – offered some historical as well as dramatic context. about what the coming tumultuous period will look like.
Fire and ice
The market will be driven by two forces – fears of inflation, or “fire” and recession, or “ice,” said Pick, who is seen as the lead successor to CEO James Gorman.
“We’re going to have these periods when it feels very fiery and other periods where it feels icy and the customer needs to navigate around that,” says Pick.
For Wall Street banks, certain businesses will boom, while others may idle. For years after the financial crisis, fixed income traders deal with artificially rated markets, giving them less work to do. Now, as central banks around the world begin to grapple with inflation, traders in currencies and government bonds will be more active, according to Pick.
The uncertainty of this period, at least for now, has dampened merger activity, as companies work out the unknowns. JPMorgan said last month that second-quarter investment banking fees are down 45% year-to-date, while trading revenue is up 20%.
“The banking calendar has dropped a little bit because everyone is trying to figure out if we’re going to clear this paradigm shift any time soon,” says Pick.
Ted Pick, Morgan Stanley
Source: Morgan Stanley
In the short term, if economic growth is maintained and inflation softens in the second half of the year, then “Goldilocks” story he said he would hold, strengthen the market. (For what it’s worth, Dimon, citing the impact of the Ukraine war on food and fuel prices and the Federal Reserve’s move to shrink its balance sheet, seems to pessimistic that this scenario will play out.)
But concerns about inflation and recession will not be resolved overnight. Select a number of times that are considered the period after 2008 as the “financial” period suppression“—a theory in which policymakers keep interest rates low to provide cheap debt financing to countries and companies.
“15 years of financial repression doesn’t just go to what’s next in three or six months … we’re going to have this conversation in the next 12, 18, 24 months,” Pick said.
‘Real interest’
Low or even negative interest rates were hallmarks of the past, as were measures to pump money into the system including bond-buying programs known collectively as quantitative easing. These moves punished savers and encouraged rampant borrowing.
By removing risk from the global financial system for many years, central banks force investors to take more risks to earn returns. Unprofitable companies have keep afloat by having ready access to cheap debt. Thousands of startups have blossomed in recent years with a mission to burn money, grow at all costs.
That is over as central banks prioritize the fight against runaway inflation. The effects of their efforts will reach everyone from credit card borrowers to aspiring billionaires running Silicon Valley startups. Venture capitalists have guide start a business to preserve cash and drive real profits. Interest rates on many online savings accounts have inched closer to 1%.
But such changes can be bumpy. Some observers are worried about Black Swan-type events in the financial system, including an outbreak of what one hedge fund manager called “the greatest thing ever.” credit bubble of human history. ”
Beyond the ashes of this transition, says Pick, a new business cycle will emerge.
“This paradigm shift will at some point bring about a new cycle,” he said. “It’s been too long since we’ve had to consider what a world would be like, where real interest rates and real costs of capital would distinguish winners from losers, winners from losers.”
